Averages Sleepwalk Through Critical Resistance – Once again, aided and abetted by some soothing noises out of the financial media, and some non-disastrous bond sales in Europe, the bulls decided to take another run at the resistance at the 200 day moving averages (DMA).

First, they fueled up the tank as the dollar dipped and the Euro bounced. That brought the usual response – oil and most commodities rose as did U.S. stock futures.

The initial assault by the bulls retreated slightly on some less than glorious housing data around 10:00. The media pundits dismissed the data dip as an “expected reaction” to the ending of the real estate tax incentive. That allowed the bulls to regroup within twenty minutes.

They marched the averages higher in staircase fashion until the S&P arrived at 1105 around 12:15. That was not only within sight of the 200 DMA (1107/1109), it was almost where they paused Monday (1106).

That provided an excuse to pause again to get a sense of how formidable the resistance seemed to be. Stocks churned sideways until 1:00. Then, as if signaled by a bell, the market began to tiptoe higher.

They punched above the 200 DMA around 2:15, but there was no follow-through – no one joined the parade. Disappointed, they snaked along the resistance band until the final hour began.

Suddenly, the bulls seemed to awaken to the fact that they had broken through resistance. They didn’t exactly break out the bubbly but did seem to party on some lower cost stuff. The late party allowed the markets to close at the day’s highs. The volume was a smidge higher than Monday’s but well short of what you’d like to see on a breakout.The rally did change many of the technicals which we’ll cover in cocktail napkin charting.

An Intriguing And Rather Gutsy Call – Over the weekend E. James Walsh sent out his regular newsletter “The Financial Commentator”. At the time that he wrote it, the averages had been rebuffed several times at their 200 DMA’s and markets appeared range-bound and uncertain.

In his newsletter, Welsh reviews the performance of his proprietary market timing device, the Major Trend Indicator (MTI) over the last ten years. The record, as he outlines it, is quite impressive. But what really caught my eye was his current projection:

Although the MTI suggests a new bear market has begun, I think the market will hold above 1,040 in the next few weeks, and establish a trading low. The coming rally should push the S&P above 1,100 and its 200 day average, which will trigger some additional buying. This rally could reach 1,135-1,150, which was the January high. The odds that this rally could carry the S&P back toward the recovery high in late April near 1,220 have diminished significantly. Once the expected rally ends, the FAA program will generate a sell short signal. The only thing that can change this negative outlook is if this rally is strong enough to push the MTI back into bull market territory. The fundamental back drop suggests this is not likely, since the economy is going to slow in the second half of 2010. Most institutional investors and economists are not expecting the economy to slow, and are likely to be disappointed. In addition, any slowdown will curb job growth and sustain default rates for all types of credit at high levels, which won’t be good news for banks.

Since the March 2009 low, the stock market has been in a cyclical rally within the context of a secular bear market that began in 2000, and could last until 2014-2016. The Major Trend Indicator suggests that this cyclical rally is nearing an end. If I’m right, and the S&P does rally, it will provide investors another opportunity to sell and get defensive. Ideally, the MTI will generate a bear market rally buy signal in the next few weeks. The quality and strength of any upcoming rally will determine when the next phase of the secular bear market is beginning. Sooner or later, I anticipate a decline of 20% to 30% to develop, if the fundamental headwinds exact the economic toll I expect. If the past is any guide, economists are not likely to see the next phase of the secular bear market in stocks coming, since they do not incorporate technical analysis into their analysis.

What struck me was his projection that the S&P would rally above its 200 DMA but that the resultant rally would fail. If that turned out to be the case, the S&P would form the right shoulder of the projected head and shoulders I wrote about a week or so ago. At any rate, I like Welsh’s specificity. It will be interesting to watch as it plays out.

Cocktail Napkin Charting – Tuesday’s action set off a variety of technical signals. First the “correction” flag that has been flying since early May can now be lowered. That’s because, as we suggested yesterday, the metrics for demand have now moved above those for the selling pressure. Investors Business Daily has also shifted out of “correction” mode in its Market Pulse column.

In another much watched development, the three key indices are now above their respective 200 DMAs. The NYSE Index didn’t quite make it, however.

The move through the 200 day moving averages now sets the 50 DMA and 55 DMA as resistance targets. The stronger of these is probably the 55 day. For the S&P that’s around the 1122/1124 area and for the Dow somewhere around the 10460/10465 (both attainable from last night’s close).

We are trying to get details on a cycle change that some traders are buzzing about that is said to kick in near end of month. When we get the specifics we’ll report.

For today, the napkins hint the first resistance is at the area cited above (S&P 1122/1124). First support should be the broken resistance (1107/1109) and then 1097/1100.

Consensus – Euro softens putting pressure on stock futures. Expiration week volatility will continue but why the low volume? (BTW expectations are for all time record volume on Friday the 25th) Mortgage apps show first bounce in six weeks, perhaps, helping builders. Random volatility is order of these times. Stay very nimble.

Trivia Corner

Today's Question - Since World War II, the U.S. government has tried to retire most currency denominations above the $100 bill. Who is featured on the $500 bill and what is the largest denomination featuring a non-president? What is the largest "printed" bill and who's on it?

AN ENCORE PRESENTATION

On this day (+1) in 1776, a man named Isaac Ketcham began a long New York tradition. He plea-bargained his way out of jail by blowing the whistle on his co-conspirators. Ketcham was in jail on a counterfeiting charge but the plot he revealed had nothing to do with that. The plot that Ketcham revealed was a conspiracy to kill George Washington...led by none other than the commander of Washington's own bodyguard.

Washington was protected by an early form of the Secret Service, a crack team under the command of a charming, roguish Irishman (ain't we all) named Thomas Hickey. Adding to his safety, Washington had a devoted housekeeper named Phoebe who was the daughter of his friend Sam Fraunces (owner of Fraunces Tavern). Add to that, the fact that George could count on Dave, the then Mayor of New York City (in this case it was Dave Matthews).

Hickey was not your typical Irishman. For example: He liked a good drink (he was in debt to several tavern owners). He had a quick mind but couldn't resist a challenge (he had several gambling debts). He also had a glib tongue, could sing like an angel and could charm a dog off a meat wagon. Also he was easily bored, particularly by a revolution that was slow in starting.

So he applied his Celtic creativity to the area of design - with a specialization in the field of currency (folks with less soul would later call it counterfeiting).

When Washington started to catch on, Hickey decided to kill the man he was sworn to protect. He found support from the mayor who was really a Tory sympathizer. They engaged Fraunces daughter, Phoebe, to serve Washington a meal with poisoned peas.

Rather than kill her father's friend, she tipped Washington, who promptly tipped the plate out the window. Outside a couple of chickens promptly ate the poisoned peas and promptly tipped over and died. That raised Washington's suspicions but they could only pin a counterfeiting rap on Hickey. That is until Ketcham exposed the plot (and another one...to enlist 700 Tory sympathizers in the Continental Army…..who would then shoot Washington and most American troops at some key point of battle). (Mayor Matthews later escaped to England.) But Hickey was not so lucky. In less than a week he was hanged....the first American soldier executed for treason.

There were no poisoned peas in the market Tuesday - at least none we noticed. In fact, the bulls had a bit of a picnic.

I love the bull and bear commentary... along with CNBC's article that technical trading is now ruling over fundamentals. As if either matter in this make believe market. Technical trading is so good at explaining what just happened and seems to work, until it doesn't. But don't worry, we have 4,000 patterns and definitions to explain why the forecast was wrong. Fundamentals have been suspended until further notice. But come along, invest for the long term and reap those 10% annualized returns..... plenty of room in the pool.

I think it is interesting we are hearing from a diverse group of manufacturers (this am FedEx, Nokia and Volkwagen) all saying the second half of the year isn't looking so peachy...is this it...we have hit the 'peak' and will dribble along until Sept and then a heavy down trend?